Glaukos Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Glaukos develops, manufactures and markets ophthalmic devices for glaucoma, with substantially all sales generated by its iStent product. The company reports one operating segment.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $29.6 million | $19.0 million | $81.2 million | $51.4 million |
| Gross profit | $25.7 million | $15.7 million | $69.9 million | $42.0 million |
| Gross margin | 87% | 83% | 86% | 82% |
| Operating expenses | $24.7 million | $17.4 million | $66.1 million | $50.3 million |
| Operating income (loss) | $1.0 million | ($1.7 million) | $3.8 million | ($8.3 million) |
| Net income (loss) | $1.2 million | ($2.1 million) | $4.4 million | ($36.0 million) |
| Diluted earnings (loss) per share | $0.03 | ($0.07) | $0.12 | ($2.78) |
Q3 sales increased 56%; nine-month sales increased 58%. Management attributed growth mainly to higher iStent unit volume, reflecting broader customer adoption and increased utilization. U.S. sales were $26.9 million in Q3 and $74.8 million year to date; international sales were $2.6 million and $6.4 million, respectively.
SG&A rose 50% in Q3 and 40% year to date, driven by personnel, foreign subsidiaries, marketing and facility costs; lower patent-litigation legal costs partly offset increases. R&D rose 26% in Q3 and 16% year to date, primarily due to clinical personnel and study activity. Higher gross margins reflected revenue growth against fixed manufacturing costs and the suspension of the U.S. medical-device excise tax for 2016–2017.
The 2015 nine-month loss included a $25.7 million charge related to deconsolidating DOSE Medical, as well as a $1.1 million warrant fair-value charge. These items materially affect the year-over-year net-income comparison.
Cash, liquidity and debt
- At September 30, 2016, cash and cash equivalents were $5.0 million and short-term investments were $88.6 million, totaling $93.6 million in cash, cash equivalents and investments. Cash and investments were $91.1 million at December 31, 2015.
- Current assets were $114.6 million and current liabilities were $18.8 million. Total liabilities were $19.0 million; stockholders’ equity was $110.2 million.
- Debt was $3.0 million, all current, comprising secured GMP notes. The notes carry 5% interest and scheduled monthly payments through December 2016; the filing states that debt service uses cash.
- For the first nine months, operating activities provided $9.0 million, investing activities used $23.3 million, and financing activities used $2.1 million. Cash and cash equivalents declined by $16.6 million. Investing cash use included net purchases of short-term investments and $4.2 million of property and equipment purchases, mainly for the San Clemente facility.
- Management said available cash, investments, interest income and product-sales cash generation should fund operations and liquidity needs for at least the next 12 months. It cautioned that further financing may be needed and may not be available on acceptable terms.
Outlook, risks and other notable items
- No specific quantitative revenue or earnings guidance is provided. Management expects sales to benefit from expanded global sales and marketing, while anticipating continued investment in sales infrastructure, clinical development, manufacturing and public-company costs. It cautioned that future losses remain possible and quarterly sales may be seasonal.
- Pipeline programs include iStent Inject, under U.S. IDE studies; iStent Supra, in a U.S. pivotal IDE trial; and iDose, in Phase I testing in Armenia and Phase II testing in the United States. Development, clinical and regulatory timing and costs remain uncertain.
- Manufacturing operations moved largely to a new San Clemente facility in September 2016. Some operations remain at the former Laguna Hills location through March 2017 while final regulatory approvals are pending. A transition disruption, approval delay, or dependence on the primary facility could affect supply, costs and margins.
- Sales remain highly dependent on iStent and the U.S. market. The filing identifies reimbursement and pricing changes, adoption and training, clinical outcomes, supplier concentration, manufacturing execution, regulatory approvals and competition as material risks. Alcon’s CyPass received FDA approval in August 2016; Glaukos expected a full commercial launch in early 2017.
- The medical-device excise tax suspension benefits gross margin in 2016–2017; absent further legislation, the 2.3% tax is scheduled to return in 2018. The University of California agreement also requires a low-single-digit royalty on certain worldwide product sales, with a $0.5 million annual minimum, expected to continue until patent expiration currently projected in 2022.
- Management reported no material legal proceedings or reasonably possible material loss contingencies known to it. Noncancelable purchase commitments were approximately $3.6 million, due within one year; lease commitments totaled approximately $3.9 million.
- Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting during the quarter. The company reported no off-balance-sheet arrangements.
Investor items to verify
- Whether iStent sales growth and customer utilization continue, particularly amid new MIGS competition and reimbursement changes.
- Whether the San Clemente manufacturing transition receives remaining regulatory approvals on schedule and avoids interruption or margin pressure.
- Cash conversion and working-capital needs, including collection of receivables, inventory growth, capital spending and scheduled repayment of the remaining GMP notes.
- Clinical and regulatory progress, costs and timelines for iStent Inject, iStent Supra and iDose.
- The effects of the medical-device excise tax resumption in 2018 and continuing University of California royalty payments on gross margin.